DIAL AND PAY
By Lauri Giesen
PCs are passé. The key to a nascent revival in electronic
person-to-person payments is the cell phone, according to
market entrepreneurs. But will the upstarts make money?
Besides a whole lot of hoopla, the dawn of the 21st Century ushered in an explosion of interest in Internet-
based person-to-person payments. Led largely by PayPal Inc., entrepreneurial technology companies and
banks alike tried to figure out ways for consumers to send each other money electronically. Among the
applications most often discussed were the ability for parents to send spending money to their children in
college and a means for ordinary people to send each other gifts or lend each other cash electronically.
But bank P2P programs, such as those at Citigroup Inc.’s Citibank and Bank One, since acquired by
JPMorgan Chase & Co., had limited value as they were mainly offered as a means to satisfy a few
customers’ demands rather than broadly marketed as a hot new service. And while PayPal today is a
successful payments company, that success didn’t come from P2P, but rather from consumer-to-business
applications—notably auction sites. PayPal quickly became the favored method for buying on eBay Inc., the
biggest auction site, and San Jose, Calif.-based eBay eventually bought PayPal in 2002.
The problem with the early P2P offerings, according to PayPal executives, was that there was no way to
make money on it. Consumers won’t pay enough to make the business profitable when they can either just
hand the cash over or mail a check for the price of a stamp. Businesses, on the other hand, are used to paying
discount fees when they accept credit and debit cards for payment and they will gladly pay a fee to give their
customers an electronic cash alternative. So PayPal went where the money was—to the P2B market.
Indeed, while electronic P2P volume has risen since 2001, in 2005 it still accounted for only about 18
million transactions, or a mere 0.1% of the estimated 35.3 billion payment transactions between consumers
in the U.S., according to Needham, Mass.-based TowerGroup, a research and consulting firm owned by
MasterCard Inc. (chart, page 32).
Now, however, several upstarts have emerged that believe they can make money on fully electronic
person-to-person transactions. They claim to have found a major flaw in the early bank and PayPal models,
all of which relied on personal-computer access to the Internet. These mavericks have all built their
programs on a different access device—the cell phone. One indicator that they might be on the right track is
that even PayPal has announced it would join them in this technology application, launching its PayPal
Mobile service last month.
“PayPal started with PCs and Palm Pilots [handheld computers], which were aimed at the wrong
demographics,” says Philip Yuen, chief executive and co-founder of Redmond, Wash.-based TextPayMe
Inc., one of the new P2P players. “People with Palm Pilots are not who you are going after with this market.
Cell phones are different; everyone has one.”
And it’s more than just having access to the device. It’s having it near you when you’re ready to pay
someone. With electronic bill payment, consumers typically sit down at their computers and pay all their
bills while checking their bank balances and finances, and they pay for products when shopping online. But
P2P payments often are made outside the home where consumers don’t have a PC handy and even a laptop
would be too cumbersome. Yet those same consumers usually have a cell phone that is easily accessible,
“Most people want to make a P2P payment instantaneously,” he says. “They see someone they want to
give money to or they think about a transfer they want to make. They want to do it right now. They don’t
want to have to go find a computer. But most people these days carry a cell phone everywhere.”
And consumers seem to be doing more with those cell phones, an indication that they just might be
willing to use the devices to transfer funds. “Consumers are using their phones these days for more than just
talking,” says Bruce Cundiff, research analyst for Pleasanton, Calif.-based Javelin Strategy & Research.
“Text messaging is much more prevalent today than it was in the late ‘90s when PayPal started up.”
Part of the reason consumers will use cell phones for more than talking is that the phones today lend
themselves to such applications as funds transfer more than older models did. “The handsets are more
advanced than they used to be and, as a result, it is much easier today to do things like send money over the
phone,” Cundiff says.
A Long Way to Go for Internet P2P Payments
(estimated total consumer person-to-person payments vs. electronic P2P payments)
Total Transactions Electronic P2P transactions
2001 33.5 8
2003 34.3 12
2005 35.3 18
Still, not everyone is convinced that the cell phone will be widely accepted as a means for consumers to
send each other money. While Jim Judd, executive vice president of the NYCE electronic funds transfer
network, owned by Milwaukee-based Metavante Corp., concedes that there will be a certain group, primarily
consisting of young people, who will want to send each other a few dollars instantaneously via a phone, he
doesn’t believe the mainstream market will buy into that model.
“The vast majority of people will still want to work through their financial institutions using traditional
means to transfer funds,” says Judd. In Judd’s view, “traditional means” includes Internet-based funds
transfers conducted through home-banking programs offered by financial institutions.
Indeed, NYCE has developed an account-to-account funds transfer service that relies on electronic links
to 70 million demand-deposit accounts and its network of ATMs and point-of-sale payment locations.
Included in NYCE’s offering is the ability for consumers to transfer funds among their own accounts at
different financial institutions and for consumers to send each other funds. The program allows customers
from any financial institution that is a member of NYCE to receive funds, but only a “handful” of banks
currently allow their customers to send funds, according to Judd. Customers can activate the transfers
through Web-based banking programs, bank call centers, and even in bank branches.
In addition to the bank trust factor, consumers making sizable funds transfers—such as parents
transferring money into their children’s accounts at college—will want to see the balances on their computer
screen after the transfer is completed, Judd says. Cell phones just don’t provide that sense of security, he
Aside from the issues associated with access devices, there also are questions about whether any
electronic P2P program can generate enough interest. Despite the new technology with its starring role for
the cell phone, some believe P2P will remain a loss leader or minor service that can attract consumers to
providers’ more profitable P2B services.
The big question that is yet to be answered is how big the potential market really is. Experts disagree on
this question, with some observers downplaying the potential size. “True P2P payments are a very small
portion of Internet payments today, and I don’t expect it to grow very rapidly,” says Beth Robertson, an
analyst at TowerGroup. “There is a lot more potential for payments companies with online bill payment and
Aside from PayPal’s efforts, Robertson also points out that the bank programs that were initially promoted
as a mass-market service have not been all that successful. Those programs today are largely limited to
facilitating transfer requests from the banks’ customers. “They’re mostly accommodating their existing
customers’ needs, but not really promoting the service,” she says.
Javelin’s Cundiff agrees that banks aren’t going to be the P2P catalyst, despite the efforts of NYCE and a
few financial institutions. “The problem with the bank programs is that they are limited to only customers of
that institution. The single-bank model will never work. You need a broader network of consumers,” he says.
Thus, the challenge for the new P2P processors is to sell the concept to those consumers. The trick,
payments experts say, will be to get consumers comfortable with moving funds in this manner. The payoff
could be huge if they succeed, as some experts disagree with Robertson’s contention that there is not a big
“I suspect there are a lot of occasions when consumers need to exchange funds and they want a level of
convenience to do that,” says Mike Friedman, a researcher with Shrewsbury, Mass.-based Mercator
Advisory Group. “If you can get them comfortable with the idea of using some sort of device to make an
electronic transaction, there should be a market.”
And like many of the executives of the startup companies, Friedman believes the cell phone may just be
the device to do that. “People rely on their cell phones more and more, but whether that extends to making
payments remains to be seen. Still, the potential is there. People have gotten used to sending e-mails on their
cell phones, so it does not seem too far of a stretch to think they would send funds via text messaging. I
especially see the younger generations doing this.”
One of the startups that some observers believe has a lot of potential is TextPayMe. The way this
program currently works is that consumers first enroll at the firm’s textpayme.com Web site, though long-
term Yuen sees the enrollment process also moving to the phone. During enrollment, consumers can specify
whether they want to charge the funds they send to a credit card or debit them from a checking account via
the automated clearing house.
When users are ready to send money, they use the text-messaging service on their phone to instruct
TextPayMe to transfer funds to another person. TextPayMe sends a confirmation and instructs the payer to
enter a personal identification number. Funds can then be sent either electronically via the ACH to a bank
account or via a check cut by TextPayMe that is mailed to the recipient.
TextPayMe is not the only company to latch on to the idea that cell phones are the way to go. Another
is Watertown, Mass.-based Vayusa Inc., whose MobileLime payment program rests on a service developed
to promote retailer loyalty. MobileLime allows consumers to send each other cash values that recipients
can redeem in participating stores.
The way it works is that consumers use their phones to initiate a funds transfer. An e-mail is then sent
to the recipient with a message telling the recipient that he can make a purchase for the given value at
selected retail locations. When the recipient arrives at the retailer’s outlet, he calls MobileLime, which
authorizes a payment. When the recipient is ready to pay for goods, he gives his seven-digit phone number.
The clerk at the checkout counter pushes the MobileLime button and the transaction is completed.
“When we looked at the P2P market, we saw that the biggest challenge was getting the money out of the
system,” says Robert Wesley, Vayusa’s president and chief executive. “Putting money in was easy because
you can just charge it to a credit card or debit card. But getting it out is a challenge, so we give them a way to
do that—to use it to go shopping. It’s a lot like an electronic gift card.”
The New Wallet
MobileLime’s interest, of course, is in more than just accommodating the P2P transaction. “We want to help
merchants increase sales as well as facilitate funds transfers,” says Wesley, a former executive at American
Express Co., MasterCard International, and Cendant Corp.
Currently there are 80 merchant locations that accept MobileLime, most of them in the Boston area, and
that base is growing rapidly, Wesley says, as the company pushes a national rollout. These retailers represent
a range of grocery stores, restaurants, movie-rental stores, and pharmacies.
And later this year, the program will be expanded to simplify the redemption process. Then, any retailer
participating in contactless payments programs sponsored by Visa USA, MasterCard, or American Express
would be able to let consumers download their MobileLime values by waving their phones near the retailers’
In the future, MobileLime’s near-field communication technology (NFC, or short-range wireless) should
allow even easier funds transfer. “Right now, the money has to be spent at one of our retail locations, but
down the road, we could use this for peer-to-peer transfers,” Wesley says. Indeed, he explains that two
consumers who were both registered with MobileLime could link cell phones and use near-field
communication to send money electronically from one phone to the other.
“Long term, we see there are a lot of ways people will want to use their phones to make payments, and
we intend to support all of them,” Wesley says. “Some will want to use voice systems, others will want text
message, and some will want to wave a phone. There will even be some who will want to go into a store to
make the transfer.”
Another approach that relies on NFC is the technology dubbed M-Wallet developed by electronics giant
Motorola Inc. “We want to eliminate the [physical] wallet and replace it with the phone,” says Sarab
Sokhey, director of business development for network services at Schaumburg, Ill.-based Motorola. “We
want to put all the payment cards onto one phone.”
With M-Wallet, consumers will be able to transfer money in and out of an electronic wallet as well as
access account statements and store receipts. Included among these applications will be P2P payments.
To do this, a consumer would click on a handset interface to either a registered debit or credit card
account. Funds would then be sent from that account to another person’s account by typing in the recipient’s
bank routing number, Sokhey says. Consumers also will be able to use their phones to make NFC-based
contactless payments at participating retailers. M-Wallet is PIN-protected and does not store any account
Motorola is testing M-Wallet with three large banks involving about 100 individuals. The tests began in
March and will last about three months. Sokhey expects several more banks to begin tests shortly.
While many of the applications planned for M-Wallet are likely to involve P2B payments, such as
electronic bill pay and retailer payments, Sokhey expects some consumers also will want P2P. “Of all the
applications, we think the retailer payments will be the most popular,” he says. “We have spent a lot of time
talking to consumers and we have not heard as much interest in P2P as we have heard about paying bills and
Still, Sokhey believes the P2P application will gain adoption. “Parents will be able to send money to
their children’s bank accounts and even set limits on how the money can be spent,” he says.
PayPal Goes Mobile
Long term, Sokhey says consumers will be able to transfer funds by touching phones, but he admits that
feature is some time off. “The infrastructure is not in place today to do that. For the time being, we see these
NFC applications being one-way.”
Another potential player is online search engine Google. In recent months, the tech community has
been abuzz with speculation that Mountain View, Calif.-based Google Inc. will enter the market through a
new service called Google Wallet. Industry sources say such a service is expected to be available in late
spring or early summer and would compete with PayPal’s offering, including the use of both PC-based
Internet and cell-phone technologies. The service would be for both P2P and auction payment transactions.
Google did not return calls from Digital Transactions seeking comment. For the record, the company
previously has said it has no ambitions to compete in the online-transactions market.
Meanwhile, PayPal is hoping its new mobile-phone offering will make such challenges that much harder.
PayPal Mobile works much like TextPayMe in that it uses text messaging to allow consumers to send money
either to other consumers or to businesses. Consumers also can call a service-center number and request a
transfer using voice responses to automated commands.
Customers must first register to use PayPal Mobile. When using the text-messaging system, consumers
are sent a text message after spelling PayPal’s name on a numeric handset keypad. They also enter a PIN and
the amount of money they wish to transfer, along with the recipient’s mobile-phone number. Payees receive
a notice and funds are deposited into their bank account.
PayPal’s new service will be offered for paying businesses as well as P2P, and the company expects the
end result to be much like its online service—mostly used for P2B. A spokesperson says that while PayPal
plans to continue to offer a P2P service, she concedes that is not the company’s main focus any more. “P2P
is an important part of our business because our customers like it, but the challenge for us is that we don’t
make any money on it,” the spokesperson says.
PayPal charges businesses that accept its payments from consumers between 1.9% and 2.9% of the
value of the transaction, plus a fixed fee of 30 cents, but it does not charge consumers who receive funds
anything. And PayPal can’t run a standalone business that way, the spokesperson explains.
Instead, PayPal makes money every time a consumer uses the service to pay for purchases at auction
sites or traditional online retailers. Then, if those same consumers want to pay a friend, PayPal is happy to
Although the spokesperson says specific numbers are not available, she notes that the majority of people
making P2P payments via PayPal are consumers who also pay businesses on the service. That is a far cry
from how PayPal originally was set up in 1998 as a program to let ordinary people pay ordinary people.
And even though most of PayPal’s early transactions were on online auction sites, such as eBay, at the
time the typical eBay seller was a private individual selling surplus household goods or collectibles. That
was a big reason auction users needed PayPal’s service—consumers selling on eBay had no other way to
accept electronic payments because they did not have merchant accounts for accepting credit cards.
Today, by contrast, most eBay transactions are the result of small or even big businesses selling
merchandise. And PayPal in recent years expanded its P2B business outside the eBay arena by selling online
retailers on the idea of accepting a new payment option—PayPal.
PayPal’s experience underscores the question of whether the P2P market upstarts will succeed. It still
remains to be seen whether consumers will pay for this type of service. Both MobileLime and Motorola’s M-
Wallet program are based on the sale of other services—MobileLime getting much of its revenue from the
retailers it supports and Motorola expecting to sell bill payment and retailer payment functionality.
TextPayMe is totally dependent on P2P transactions for revenue, and even Yuen admits he hasn’t
completely figured out how TextPayMe will configure its pricing plans going forward. He believes,
however, that there is a way to make the business profitable. “You need to be creative about how you
charge for this and we’re still considering several options,” he says.
Yuen notes the traditional fee-per-transaction model may not work and is considering a monthly
subscription charge for registered users. Then users would not be charged each time they made a
“We’ll look at the user patterns of people in our beta test. That should give us a better idea what type of
fee most users would be comfortable with,” he says. As is the case with most such tests, TextPayMe is not
charging users during the test period.
And not everyone buys into the notion that consumers won’t pay for the service. NYCE’s Judd notes that
“consumers will pay for these services if you can make their lives easier and you are able to show real value
with the service.”
Additionally, Judd believes banks will become more interested in offering similar services in the near
future. Their interest won’t be purely in generating fee income, but rather in providing value-added services
that will appeal to their most profitable customers, ultimately leading to better customer retention and more
business from existing customers.
Fee revenue aside, some observers have concerns about the ease of use of the new offerings. While
there is no doubt cell phones are certainly accessible and convenient to use, some question whether relying
on text messaging and requiring consumers to sign up by supplying bank or credit card data ahead of time
makes the process too cumbersome.
“There is a huge market for P2P, but nobody has cracked it because nobody has made it easy enough to
use,” says Gwenn Bézard, research director for Boston-based Aite Group. “It’s hard to compete with cash
because cash is so easy to use. You don’t have to sign up or remember any codes.”
Long-term, Bézard believes the answers to cracking this market will come more from cell-phone
manufacturers and wireless carriers that will build the services into the phones themselves. Then, customers
won’t have to register account information, for example, and the phone carrier will automatically know
where to deposit received funds as well as get funds for transmittal.
“You need to have a deeper involvement by the carrier and manufacturer of the phone so that many of
the procedures are already built into the phone before you begin,” Bézard says.
In the meantime, the new services will look for ways to jump-start the market. While Yuen has no
interest in using his service to pay businesses, he is eyeing such Internet services as Craig’s List, where
consumers list items for sale that others can purchase. Yuen notes there are 100 to 115 similar online sales
sites where consumers sell to each other. He estimates those sites do about $50 million in sales annually,
and he hopes to capture up to 10% of that market.
That could be sizeable. But the big question remains as to whether consumers will trust the little cell
phone to do what TextPayMe and the other maverick services say it can do—send money to friends and
family—and then pay for that ability. The upstarts are banking on a “yes” to that question.